Tag: risk management

Warning: You’re not going to agree with me on some or all of these. That’s okay. That’s actually the first one! :)

1. DISAGREEMENT

It seems like most people try to agree. They try to find common ground, achieve alignment, come together, whatever. And sometimes that’s helpful because when you work together with someone, you tend to achieve more when everyone is moving in the same direction. Agreement is ingrained in us because every story (whether book, movie, TV show, etc.) is basically about people who disagree and then discover a resolution (sort-of an agreement, even if it involves explosions). We tend to agree with our heroes.

BUT… a dissenter is good. History is built on dissenters. Businesses are founded on dissenters. Even countries are founded on dissenters. We don’t always have to agree. Disagreements (when healthy) breed discussion and growth.

2. RISK

Risk is fascinating. I love studying risk! Most people’s ideas of risk are broken. The average stock market investor tries to reduce risk. We’re wired to avoid it.

But who are the most successful investors? They’re the ones who accept some level of risk. (Warren Buffett understands that there is risk in the market and he accepts it. Even though he’s thought to be a safe and risk-free investor, he’s actually not and it’s to his benefit). And here’s a great example of how people are insanely risk averse: So many people dream of quitting their job and starting their own business but they can’t take the risk of giving up that paycheck. (By the way: I have a solution for that. If you want to start a business without the risk of quitting your job, do this).

Risk is good. Period. Yes, it needs to be managed and monitored closely and it should always be in balance with reward but risk is a good thing. (I talk a lot more about this at the blog post Ideas about risk that we have totally wrong.)

My advice? Do more stuff. Make more mistakes. Love those mistakes and learn from them.

4. BULLIES

This will be perhaps my most controversial addition to the list. Even before hitting “Publish” on this post I was tempted to remove it. But here it is anyway.

I was bullied in school. It sucked. I wished it never happened and I have emotional scarring as a result. (Gosh, am I actually admitting this on my blog???) And I support how bully-intolerant we’ve become as a culture.

BUT… because of bullies, I am where I am today. They solidified who my friends were (and weren’t), they were a key factor in me moving to a different city in my late teens (which launched some very positive changes in my life), they showed me that the world isn’t always fair but I need to be a good person anyway, and they motivated me to do well in life as a sort-of revenge for how they made me feel in grade school and high school. (Where are they now? I have no clue, and I’m not about to devote any bandwidth to finding out. But success is sill the sweetest revenge).

5. BAD CLIENTS

Bad clients make you work hard and then pay as little as possible while complaining about it, or they disappear with out paying. Or they leave a bad review. Or they take advantage of your guarantee. It happens and it sucks and sometimes it causes some short-term financial pain.

But but clients strengthen your “jerk-o-meter” and help you know for next time. And I’ve learned that bad clients are also an indicator of your success: When you’re just starting out and you’re willing to accept any clients, you put up with the bad ones. But as you get to be more successful, your ability to say “no” to a client — to turn them away if you don’t think it’s a good fit — is an AMAZING feeling.

6. LACK OF MONEY

I’m mostly speaking about having a lack of money in business, although I suppose this also applies to personal life as well.

Being short of cash sucks. It feels like you’re handcuffed and can’t do everything you want to do in your business. You wonder how you’ll afford a key investment or how you’ll pay your staff this money or how you’ll pay yourself this month.

But, when your business is short of funds, it is a fantastic motivator to get your ass out of your seat and start selling. It refocuses you on the important stuff. Being short of funds alerts you to the fact that your expenses seem to outpace your income, so you need to take a closer look at those expenses and trim them, and you need to boost that income. A lack of money also forces you to get creative.

Several years ago my business ran out of cash when I got a MASSIVE tax bill that I was simply not prepared for. I had to buckle down and work HARD, putting in long days every day for months in order to cover the tax bill. It was a very dark period in my business. But the result was incredible: I learned a lot, I raise the bar on what I could achieve when motivated, and it even opened up a couple of new opportunities for me.

Business tends to run in cycles: During the fat times, you spend a lot and you don’t hustle as hard. During the lean times, you spend less and you hustle hard. And so it goes like that, back and forth and back and forth (this happens in the economy, too) and hopefully you learn enough in the lean times that you make the fat times less silly, and you put away enough in the fat times that you make the lean times a little less lean. But lean times are still good.

7. DEADLINES

My entire life is built around deadlines. Every week I jam out content like a maniac because of deadlines. I hate them.

But… there have been a few clients who have said, “oh, just get me the project whenever you can” and guess what happens. The project gets deprioritized over and over and over again. And my own projects (like my first book, and now like my second and third books) get pushed farther and farther back. Deadlines give us a goal and keep us focused.

8. DEATH

The death of loved ones is very painful. When family or friends pass away, we’re left with a hole in our hearts and our lives, and sometimes even a bit of regret that we didn’t get to spend more time with them.

But death is a kind of deadline. The ultimate deadline. I don’t say that to be morbid, I’m just tying it back to my previous point. Like any other deadline, death reminds us to live now. When someone I know has died, I find myself revisiting my own life and considering whether I’m living the life I should be living.

When my grandfather passed away just the day before my 35th birthday, I was (of course) very sad at the loss (although it was not unexpected as he’d been in ill-health for a while) but it made me reflect on the way he lived his life to the fullest and inspired me to do the same. And when my friend and business colleague Rod lost his life unexpectedly, I renewed the commitment I had made in several areas of my life that he had impacted. These are just two stories but I’ve experienced more myself and know of many other stories that are similar. In fact, I’m writing a book for a business that started when a couple made a commitment to a friend of their who died of cancer — it’s a fascinating story and one I hope you get to hear someday.

9. PAIN AND DISCOMFORT

No one likes pain. We’re wired to avoid it. Just look at anyone who thinks they’re about to be in pain and we see them throw all personal pride out the window — whether it’s a flinch from a near miss, or hearing a bee buzzing around your head, or hitting your thumb with a hammer… whatever. When there’s pain or we think there’s going to be pain, we react in a primal way.

Pain hurts, discomfort is uncomfortable. (Duh). We do what we can do avoid them because our DNA is embedded with a desire to reduce pain and discomfort and increase pleasure. Nothing wrong with that. And hopefully our businesses grow to give us more time and money to enjoy the pleasures of life.

But there is good that can come from pain and discomfort. Some of the examples I’ve listed above (bullies, death, lack of money) all cause some amount of pain or discomfort and I’ve shown how they can make us better. The most successful people are not those who avoid pain and discomfort but who find a way to get through in spite of it. The best business example I can think of is selling. Selling can be hard. when I first graduated from college I went into sales and struggled at first. And then, for some bizarre reason I ended up in financial sales where I was making cold calls and even selling door-to-door. At one point during that time, there was so much discomfort that I threw up all over myself in anxiety before going out to sell. (Why am I making all these crazy admissions in this post???). But I pushed through. I prevailed. And now? I feel like I can sell anything. I can navigate my way through a sale confidently and comfortably because I pushed through the discomfort.

Or here’s another example: When you’re just starting out in your business and not sure how to do something. At first it takes you a bit of time and it seems difficult and slow. After a while, though, if you can push through the discomfort without giving, it becomes easy.

CLOSING THOUGHTS

I’ve listed many things that suck. But they’re also awesome, not because of what they are or what they put us through… but because of what we become as a result. We become better people — stronger, more resilient, with renewed focus, and a sharper desire to succeed.

So accept and embrace those challenges and push through because the other side is better.

I’ve been reading Aswath Damodaran’s book Strategic Risk Taking: A Framework for Risk Management. It’s a great read and I reluctantly had to put it aside while guests where here; I’ve just picked it up again and am continuing to devour it; I read some of the book and then reflect on how it impacts my business, my clients’ businesses, my readers’ businesses, and my thoughts of the capital and real estate markets… and then I read some more.

As I’ve been reading, I keep coming back to the idea that people can get pretty screwed up when it comes to risk. We think we’re risk averse, and sometimes we act that way, but other times we make decisions that are explicitly (or implicitly) risk-welcoming.

Here are some that I see frequently. (And believe me, I’m not judging people who think these things because I myself face some of these same ideas!)

Buying stocks high instead of low and selling low instead of high: Investors see stock prices really low and decide to wait and see if the price goes up before they buy. This mindset is a problem because investors need to buy low and sell high but all too often, investors (especially amateur investors) wait until the stock is high before they buy (because, in their mind, the high price is confirmation that the stock is worth buying). The same is true of stocks that investors hold: They should sell high but instead they see the prices declining and they want to cut their losses so they sell low. We all KNOW that we are supposed to buy low and sell high but we often do the opposite.

Buying properties: The same thing happens with properties. Homebuyers may feel that prices are too low to buy (perhaps because they are expecting prices to continue to decline?) and they’d rather wait for prices to go up. But rising prices can make some houses unaffordable. It’s better to buy when the prices are low.

Timing the market: Similar to above, many investors try to time the market. They know they’re supposed to buy low and sell high so when the stock is low they think it might keep going lower so they don’t want to buy right now. They wait. The stock goes down. Then the stock goes up. Then the stock goes down. Then the stock goes up. A stock “bottom” shouldn’t be thought of as the lowest point but rather it should be thought of as a window in which the stock price is low.

Investing in crazy things: Many investors would say they are risk averse when investing in the capital markets. They buy mutual funds or blue chips because their financial advisor tells them to and they claim to be careful with their investments. But then they hear a “hot tip” from their neighbor about an amazing biotech IPO and their whole risk-aversion flies out the window.

Buying lottery tickets: This one is really fascinating to me. If you were to ask someone to throw away a couple of bucks into the trash everyday, they would think you are crazy. And yet, people spend a lot of money in lottery tickets every week without considering the odds.

Wanting to quit a job but being willing to take the risk: Wow, I see this so often! People who want to quit their job (because they hate it or their salary is capped or they want some freedom) but they can’t handle the small risk of an unknown paycheck. The weird part is, there are many things they can do in the interim period as they build a small start-up before they quit their job but they just don’t do it. They’re content to watch TV in the evenings and go to work during the day and dream… but that’s it.

Wanting to grow a business but not wanting to risk anything: I see this one a lot too! Business owners who start a business and want to grow it but aren’t willing to invest anything into their business. So you get people who want to market their business but they hire the cheapest non-English-speaking writers to create their marketing and then wonder why their marketing isn’t connecting with clients. Or business owners who know they should build a mailing list but don’t want to invest in the software to get them there.

Investing in the wrong things: I see this one a lot among real estate investors — they invest tens of thousands of dollars into training over decades but won’t take the risk of doing a deal. (One of my clients calls these people “7 year newbies”).

In all of these examples, you can see how we approach risk in a puzzling way. We claim to be smart about risks but then we act inconsistently, sometimes choosing the risk-averse way and sometimes choosing the risk-accepting way (and sometimes being too much of one or the other)… and often doing the opposite of what we should be doing.

Is there a solution? I don’t think my one measly blog post is going to erase thousands of years of questionable risk judgement. However, whenever faced with a decision that involves risk, we should ask ourselves how we should be acting and compare it to how we really do act and then try to figure out why there is often a difference.

In chapter 4 of his book, Damodaran talks about how, in the nineteenth century, the idea of risk changed. Risk was once thought of as a function of loss (which is why we have insurance) but then it changed and risk became a source of profit (which prompted investors to create various statistical risk measures).

The idea of risk as a source of profit has been a rock in my shoe. I can’t get the thought out of my head.

A FEW WAYS THAT BUSINESSES PROFIT FROM RISK

It strikes me that all business profit from risk in many different ways:

First, businesses profit from risk by buying raw materials at a low price and then selling finished products at a higher price. They risk raw material prices going up and they risk that their finished products will have pricing pressure to cost less. They minimize this risk by negotiating for lower raw material costs and by periodically raising the prices of finished products.

Second, businesses profit from risk by hoping that people need their products and services. Here’s an example: People used to get where they needed to go by foot or by horse. Ford (and others) took the risk that people would want to get somewhere faster and a little more comfortably so they built a car. Here’s another example: Businesses could probably hire people to perform various functions and tasks but software companies took the risk that those same functions and tasks could be automated to free up staff for other purposes. Here’s another example: People could always make their own food but McDonalds took the risk that sometimes people would not want to cook but they would want something fast and affordable that they can eat on the go. Businesses minimize this risk by doing market research first and by making mid-course adjustments based on customers feedback.

Third, businesses profit from risk by competing with other businesses. They bring a slightly different business to market and hope that their offering is more attractive to customers than their competitors’ offerings (and they hope that another competitor doesn’t come along and out-do them). Businesses minimize these risks by targeting a narrow market, providing a ton of value, and marketing like crazy.

Fourth, businesses profit from risk by hiring staff to do the work that will collectively result in a product or service being delivered. The risk is that they’ll find enough employees to hire affordably, and that even on unproductive days, those employees will still collectively do enough work to deliver what the business promised. Businesses minimize these risk with hiring practices, training, incentives and perks, human resources departments, employee reviews, and more.

Fifth, businesses do all of this in an environment that risks running unprofitably because of inflation or litigation or government regulations (and more). Businesses minimize these risks with investing and expansion, lobbying, insurance, and more.

As I write this, I realize I could go on and on. There are many of ways that businesses accept risk to earn a profit.

WHAT ABOUT FOR YOUR BUSINESS?

If you run a business, you accept the risks in order to earn a profit. Ultimately, you are risking the possibility that people will try to do something themselves instead of getting you to do it for them.

And if you think “They couldn’t do this themselves”, you’re kidding yourself — which is exactly why financial advisors and real estate professionals are facing industry-changing competition from DIY options.

Every consumer has a do-it-yourself option for everything in their life (from health to food to finances to legal to transportation to employment — you name it!). Your job as a business owner or professional is to “take on the risk” and make your product or service so awesome that the customer immediately sees that their DIY option as the riskier (costlier and more time consuming and failure-fraught) choice.

All of those readings ended up being connected (at least in my mind) and related to humanity’s desire to push beyond the boundaries we’ve set for ourselves — to accept the costs and the risks associated with the unknown and to pursue expansion.

You’ll see when you look at the chart that we started making attempts in 1960 but the first 6 attempts in the first 4 years failed. On the 7th try, we had something called success but the multi-million-dollar mission was considered a success even though it only sent back 21 photos of Mars.

It wasn’t until 1969 that we started to achieve success beyond a couple of photos and even those missions weren’t anything other than flybys; it wasn’t until 1971 that we had our first orbital mission success; it wasn’t until 1976 that we actually got a lander to touch down on Mars and start sending information back. (There were a couple of sketchy lander attempts earlier that didn’t send back data).

Even after this first successful attempt, there have been many other attempts with mixed results — success, partial success, and failure — pretty consistently over the years; beginning in 2000, we started achieving more regular success; today the thought of sending a team to Mars (at least one-way) seems more and more likely, with initiatives like Mars One hoping to achieve it within a decade.

When you read my timeline synopsis above, you notice some interesting things: We started exploring Mars in 1960 and spent (collectively) billions of dollars to do it, facing failure after failure until the first hint of success coming in 1964 and the first real success coming in 1969 — a full nine years after those first failed attempts. And results continued to be mixed right up through the 1990’s. Now, our successes are more frequent but they are still short-lived, costly, and the track record isn’t perfect.

But we’re doing it anyway. We’re pushing forward anyway. In spite of the costs and the risk, we explore with an eye on knowledge and an eye on expansion. This isn’t any different from when Columbus (and his peers) pushed forward and sailed into the unknown seas in spite of dire warnings like “There Be Dragons”.

Okay, you’ve patiently read through 550+ words about exploration. So what does this have to do with business?

At the risk of getting a little philosophical, businesses have a similar need to push forward. They explore and expand in an attempt to grow. Although most business’ purposes are profit-driven (as opposed to humanity’s quest for knowledge and bragging rights), the outcome is the same: Businesses have an inherent need to grow beyond themselves. So we shouldn’t be surprised when we read in The Economist that mergers and acquisitions are picking up.

I think the answer lies in our discussion above about Mars exploration. We do it anyways because we need to. The costs and risks are high and the rewards are often mixed even when there is success, but businesses need to grow beyond themselves.

Unfortunately, the options businesses have to grow are limited: They could start something (i.e. on a small scale, like an innovative product, or on a larger scale, like starting a new brand or business) or they could buy something that is already running. The possibility of crash landing is always there but businesses do it anyway because they hope to get to the point when they learn how to do it right. It’s easy to point to mergers as being frequent failures because they are more public and we don’t always see the many failures in a company’s skunkworks.

We often praise Edison for his perseverance while building an (anecdotal) 10,000 failed attempts at a light bulb but we readily criticize a business that tries to merge and fails.

Businesses need to grow, and mergers and acquisitions are an option (even though they are rife with failure). But we need to do it anyway for the very same reasons that humans are exploring Mars. The costs and risks are high and success is elusive… but we get better each time. And maybe — just maybe — a business will find the formula it needs to make it work.

Damodaran talks about how people perceive risk and the paradoxical way they act on risk as a result of those perceptions. What I mean is: People should be consistent in how they act when faced with similar risks but they aren’t. They perceive risks different for a number of different reasons that has very little to do with the ultimate result. Risk aversion or risk acceptance has a lot to do with perception! I touched on that idea a bit in a previous blog post called The paradox of risk: Why most people want certainty but gamble anyway, and I listed a few of these paradoxes in my experience as a financial and real estate writer and former stockbroker.

For businesses who are trying to sell stuff, this can actually make it more difficult. When we sell, we ask our customers to risk something (their money, their time, and perhaps even their reputation) to buy from you and when the reward of your product is greater than the risk of buying it, all customers should theoretically buy. That’s the logical sequence of a consistent approach to risk.

However, because there are factors that impact our perceptions of risk, people do not react logically and consistently to risk and therefore your customers may choose to buy the exact same product for the exact same price from your competitor. It all comes down to how we perceive risk.

In chapter 2 of his book, Damodaran lists some of the ways that risk perceptions change (even when the underlying risk itself doesn’t change). I’ve taken his list (from page 26 of his book) and extrapolated some of them to show you how your marketing and sales efforts can be tweaked slightly to help you sell more.

Framing: Damodaran talks about how people are more likely to buy a product that normally lists for $2.50 and they can get it for 20% off than to buy a product that sells for the list price of $2.00. Even though they pay the same price, the higher-priced product that has a discount appears to have higher value. (Interestingly, and Damodaran doesn’t touch on this, but I think this will only work within a certain range. A high priced product with too big of a discount will suddenly appear to be underpriced and therefore desperately under-valued). On a related topic, I’ve observed that people respond far more positively to a “pay no tax” sale compared to an across-the-board discount of 15% or more. Even though they say only 5% to 12% (depending on the sale tax where they are shopping), the idea that they might be screwing the government out of money is an attractive frame to people.

Non-linear preference: Damodaran says that individuals who prefer product A to product B, and product B to product C should, theoretically, prefer product A to product C… but this is not always the case. What that means for businesses is: You need to filter your customers into target markets but it’s okay to offer products from time to time that you don’t think they would be interested in.

Source: Damodaran calls this “the mechanism through which information is delivered may matter, even if the product or service is identical”. He goes on with an example about two identical products that are packaged differently. People may buy the product with one type of packaging and not the other, even though they plan to discard the packaging. This is an exciting opportunity for businesses because it affirms that your marketing and sales (which are a type of packaging) really matters. A lot. This is a reason why you want to be an expert (check out my related blog post about how real estate agents can differentiate themselves from their competition).

Loss aversion: This is huge. People are more motivated by loss than by gain. I blogged about this in my post why your prospects aren’t buying from you. Therefore, your marketing and sales efforts need to spend a lot of time addressing the problem of perceived loss and how your customers can gain (and never lose!) when they buy from you.

I’ve only highlighted some of Damodaran’s list and he doesn’t suggest that his list is comprehensive. But if you’re wondering how to get more people buying from you, this is a great start.